The Consumer Financial Protection Bureau has adopted a final rule setting forth the procedures it will use to supervise nonbanks engaged in conduct that poses risk to consumers.

The Dodd-Frank Act authorizes the CFPB to supervise any nonbank—regardless of its size—that the CFPB has reasonable cause to determine "is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services." The CFPB's authority covers not only nonbank providers of consumer financial products or services, but also extends to such a nonbank's affiliate service providers. A risk-based determination is to be made through the CFPB's issuance of an order after providing notice to the nonbank and a reasonable opportunity for it to respond.

This supervisory authority is in addition to the CFPB's authority under the Dodd-Frank Act to supervise a nonbank that is any of the following:

Regardless of its size, a provider of residential mortgage loans or certain related services, payday loans, or private education loans

A provider considered to be "a larger participant of a market for other consumer financial products or services"

Regardless of its size, a service provider to another entity subject to CFPB supervision

It is unclear how the CFPB intends to use its authority to supervise nonbanks using risk-based determinations. If it were to find a systemic legal violation in a particular industry, it might attempt to assert supervisory authority over all companies in that industry that it identifies as having committed violations. It might also use the rule to supervise smaller entities in the same markets in which the CFPB has elected to supervise "larger participants."

The final rule, which substantially tracks the CFPB's proposed rule issued in May 2012, contains the following highlights:

The CFPB must send the nonbank target a "Notice of Reasonable Cause" describing the basis for the CFPB's assertion that it may have reasonable cause to determine the nonbank is engaged or has engaged in conduct that poses risks to consumers. Unlike the proposal, the final rule also requires the notice to include "a summary of the documents, records, or other items relied on by the initiating official to issue a Notice." The final rule also extends from 20 to 30 days the time a nonbank has to respond to a notice by either contesting the CFPB's assertions or voluntarily consenting to its supervisory authority. (The procedures also allow a nonbank to consent to supervision at any time.)

A "Notice of Reasonable Cause" must be based on consumer complaints the CFPB receives through its complaint system or "information from other sources." The CFPB rejected comments requesting that the proposed rule be revised to require it to verify complaints or identify the other sources of information upon which the CFPB based its reasonable cause determination. It also rejected the suggestion that the final rule require it to meet with a company before issuing a notice.

A nonbank's failure to raise an issue in the response, or submit any records, documents, or other information with it, constitutes a waiver of the nonbank's right to raise such an issue or rely on such materials at any future stage. The CFPB declined to include an exception for information that "could not reasonably have been discovered" when the response was submitted. The CFPB reaffirmed its view that the waiver is necessary "to remove any incentive for a respondent to wait until after filing a response, such as at a supplemental oral response or during judicial review, to raise an argument or present documents or other information for the first time."

The proposal provided that materials submitted with a response to a Notice of Reasonable Cause would be deemed confidential supervisory information. The CFPB agreed with commenters that all aspects of a proceeding under the final rule, including a petition for termination of a supervision order, should be confidential. Accordingly, the CFPB expanded the confidentiality provision in the final rule to also cover all materials submitted by a respondent, all documents prepared by, or on behalf of, or for the CFPB's use, and any communications between the CFPB and a person.

If a nonbank also wishes to present arguments in a supplemental oral response, it must include such a request in its response to a Notice of Reasonable Cause. While the proposal only provided for supplemental responses by telephone, the final rule permits a respondent to request an in-person response. No discovery will be permitted, and no witnesses may be called in connection with an oral response. Within 14 days of receiving a request for an oral response, the CFPB must notify the nonbank of the date and time of the response (which may not be scheduled sooner than 10 days after the date of such notification).

If a nonbank has not consented to CFPB supervision or requested a supplemental oral response, the Associate Director for the CFPB's Division of Supervision, Enforcement, and Fair Lending (or his or her designee) must recommend a determination no later than 45 days after receipt of the nonbank's response. If the nonbank did not file a timely response, the Associate Director must make such a recommendation no later than 45 days after the service of the Notice of Reasonable Cause. If a nonbank requests an oral response, a recommendation must be made no later than 90 days after service of the notice. The CFPB declined to revise the rule to allow respondents to file objections to a proposed determination before the CFPB Director makes a final determination. The final rule only requires the CFPB to provide a copy of the recommended determination to the respondent when the Director issues a final determination.

The CFPB Director must make a final determination no later than 45 days after receipt of the Associate Director's recommendation by issuing an order that subjects the nonbank to supervision or notifying the nonbank that it is not subject to supervision. Unless a nonbank has voluntarily consented to CFPB supervision, it may petition the Director for termination of such an order beginning two years after the order's issuance and annually thereafter.

If the CFPB seeks to assert supervisory authority over a company that is subject to an enforcement action, it can provide notice and an opportunity to respond in the notice of charges. In those circumstances, the procedures described above would not apply.

According to the CFPB, the final rule was not required by the Dodd-Frank Act but was nevertheless issued to provide transparency regarding the CFPB's procedures. The final rule will be effective 30 days after its publication in the Federal Register.

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